Can and should your religious organization seek church status with the IRS? A look at a few pros, cons, and due diligence considerations.
Through over 15 years of representing nonprofit organizations, one thing is for certain–there are infinite exempt purposes that may be served within the confines of section 501(c)(3) of the Internal Revenue Code. No matter how similarly situated for tax purposes, every tax-exempt or nonprofit organization has unique attributes of governance, operations, and focus. The same is certainly true in the religious organizations space. As my long-time religious law mentor once said, "God loved us so much there is a church, synagogue, mosque, temple, or other place of worship available for every individual to pray and seek peace."
Some of my nonprofit clients exist primarily to advance religious purposes-religion is a core and fundamental focus of all things organizational and operational for those organizations. That focus does not, however, make those organizations a "church," as that term is defined (or considered) by the Internal Revenue Service. As in any organization structure, there are advantages and disadvantages to church status.
This Freeman Law Insights blog provides an overview of some key considerations on the topic of whether an organization that exists primarily to advance religious purposes might be in a position to (and should) apply for church status with the IRS.
Organized and Operated Exclusively for Exempt Purposes
The organization must be organized and operated exclusively as a tax-exempt organization as described in section 501(c)(3) of the Internal Revenue Code and related Treasury Regulations. For a deeper dive into these federal tax law requirements, see State Bar of Texas white paper linked here, Representation of Texas Nonprofit Corporations.
In the Beginning-Considerations for Church Status
The organization should evaluate the process and requirements for seeking church status as well as the current state of the organization's existence, governance, and operations. Although perhaps not exclusive, the main disadvantages for moving forward with an application for church status are essentially three-fold:
(1) Whether the organization desires to undertake the time, energy, and expense for a wholistic evaluation and, where appropriate or necessary, to modify current articles of organization, bylaws, and other foundational policies as well as operations to best qualify the organization into church status.
(2) Whether the organization is committed to an operational model that honors the modified foundational governance documents and operational requirements for maintaining church status.
(3) Whether being recognized as a church could limit or exclude certain corporate funding sources who may have policies against grants or contributions to churches but not necessarily religious organizations.
Application for Church Status
The organization should evaluate whether the IRS currently recognizes the organization as a public charity under section 501(c)(3) of the Internal Revenue Code. See IRS Search for Exempt Organization Information. If the organization already exists and has been granted public charity status, a request for church status is made by use of IRS Form 8940 - Request for Miscellaneous Determination; exemption from Form 990 filing requirements. To support an application for church status, Form 8940 may be supplemented with a proforma Schedule A from IRS Form 1023 (link to instructions for Form 1023 and guidance from IRS regarding characteristics of a "church" and application for church status).
The application should be accompanied with the organization's governing documents and other records and information to support the characteristics of a "church." See IRS "Churches" Defined
Current Governance/Operations and Modifications for Church Status
The organization should evaluate its current articles of organization to see if its current articles would, at a high level, serve to qualify the organization as a church. Many religious organizations (that are not necessarily churches) primarily focus on the advancement of religion, which is a characteristic of "charitable" as that term is used in section 501(c)(3) of the Code. The term "religious," as used in section 501(c)(3), is not defined in the Code or applicable Treasury Regulations, due primarily to First Amendment considerations. See 26 C.F.R. § 1.501(c)(3)-1(d)(1)(i)(a) (listing exempt purposes, including "charitable" and "religious" and defining "charitable" but providing no definition for "religious").
The organization may need to amend and restate its articles of organization, bylaws, and other core governing documents to better dovetail into the operational characteristics of a "church," as considered by the IRS. See IRS "Churches" Defined. Ideally, these modifications should be supported by written policies, programs, and protocol tied to the characteristics of a church.
Property Tax Exemption
One major benefit of church status is an increased likelihood that the organization will qualify as a "religious organization" for religious property tax exemption purposes under Texas law and, perhaps, other states where the organization has real or personal property. Currently, and given current climate and attitude at local appraisal districts, religious organizations are heavily scrutinized in property tax exemptions. Without reinventing the wheel on an overview of Texas law on the issue, see Texas Religious Organizations Property Tax Exemption (April 23, 2022, Freeman Law Insights blog by me). Other applicable state's property tax exemption regime may be similarly evaluated.
Another benefit to church status may be in the area of employment laws, particularly in regard to those employees who qualify as a "minister" for employment law purposes (not tax purposes, necessarily, which is another discussion topic). If the organization is organized and operated as a church, the likelihood that the organization may enjoy the ecclesiastical exception to employment laws is likely increased, for certain employees. Whether the law will allow the organization to qualify any employees as ministers for employment law purposes is one area that should be evaluated, but church status would increase the likelihood of application of the ecclesiastical exemption to employees who may qualify as ministers for employment law purposes.
But, religious organizations, including non-churches, already enjoy a level of exemption from employment actions based on religion.
Title VII makes it an unlawful employment practice for an employer to fail or refuse to hire or terminate any individual, or otherwise discriminate against any individual, because of the individual's religion. See 42 U.S.C. §2000e-2(a)(1). However, Title VII contains exemptions applicable to religious organizations. See id. at § 2000e-1(a). Specifically, the statute states: "[Title VII] shall not apply . . . to a religious corporation . . . with respect to the employment of individuals of a particular religion to perform work connected with the carrying on by such corporation . . . of its activities with respect to the employment of individuals of a particular religion to perform work connected with the carrying on by such corporation of its activities. 42 U.S.C. § 2000e-1(a); see also 42 U.S.C. § 2000e-2(e)(2) (providing an exception to religious-based discrimination where the person's religion "is a bona fide occupational qualification reasonably necessary to the normal operation of that particular business or enterprise").
The Fifth Circuit Court of Appeals offers no specific framework in regard to the exemptions set forth in 42 U.S.C. § 2000e-1(a). See Aguillard v. La. Coll., 341 F. Supp. 3d 642 (W.D. La. 2018) (stating "With regard to the Title VII exemptions, the Fifth Circuit has not offered specific guidance."). However, the courts generally consider a non-exclusive number of factors to establish whether the employer entity is a religious organization within the scope of the exemption of 42 U.S.C. § 2000e-1(a): (1) whether the entity is supported and controlled by a religious corporation; (2) whether the entity was founded by sectarian persons or entities; (3) the atmosphere of the entity; (4) the nature of the entity; (5) whether the entity's facilities are decorated with religious images; and (5) whether regular religious ceremonies and practice are observed.
Form 990 Benefit and Disadvantage.
Church status may also exempt the organization from the filing requirements for Form 990, which is a benefit. A disadvantage to this benefit is a lack of transparency to the contributing public. Some donors (major or otherwise) prefer or require an opportunity to examine the prospective charity's annual Forms 990. But, the organization may mitigate this disadvantage by continuing to prepare and publish, if not file with the IRS, an annual Form 990. And, by filing a Form 990, the organization allows the start of the applicable statute of limitations for federal income tax liability purposes. If, as a church, the organization does not file a Form 990, the statute of limitations on potential tax liabilities never expires for the applicable tax year for which no Form 990 is filed with the IRS.
A final benefit that I will address here is that, as a church, the organization may enjoy the benefit of limitations on the IRS for engaging in an examination of churches. See 26 U.S.C. § 7611; IRS Church Tax Inquiries.
In closing, the primary disadvantage for seeking church status is the cost and effort to undertake the wholistic evaluation and, where appropriate or necessary, modify the organization's current state of governance and operations to increase the likelihood of a successful application for church status. If the organization desires to apply without any front-end changes, then this disadvantage is mitigated, but the likelihood for church status may be reduced.
With the organization's current and historical focus on advancement of religion, perhaps the changes necessary to achieve church status are not too onerous. But, in my experience, such an evaluation and adjustment always takes more time, energy, and expense than perhaps anticipated. And, once those adjustments are made, the organization must honor the modified foundational governance documents and operational requirements for maintaining church status.
The organization could evaluate the current state of governance and operations, mock-complete a Schedule A to Form 1023 Application for Tax Exemption, identify where voids for church status may exist or where baseline changes may be needed to increase the likelihood of successful application for church status, and then determine if the time, energy, and expense associated with those changes is in the best interest, long-term of the organization for the potential return benefit of being a "church." This front-end evaluation of church status would be a valuable asset for the organization's governing body to make an informed decision on the matter.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.